The London Breakout Forex Trading Strategy is a day trading strategy that aims to cash in on the trading range before the London opening session.
As the London market opens 5-6 hours earlier than New York, this market is used by Forex traders to measure the market conditions on that day.
In this article, you will learn two different methods to determine the London trading range.
How to Define the London Range?
The most basic approach to define the London range is by utilizing the high and low of the previous trading session which is the Asia trading session.
This approach takes into account the whole price action since the start of the new trading day. The main benefit of this method is that it’s really efficient for trade management.
The second approach to define the London trading range relies on closing prices rather than candle wicks.
Bear in mind that this approach is best used in conjunction with Asian currency pairs such as the USD/JPY.
When to Trade the London Breakout Forex Trading Strategy?
The best time to trade the London breakout strategy is one hour prior to market open and one hour after the London open. The market opens at 8:00 AM GMT so you need to be ready to trade between 7 AM and 9 AM GMT.
London Breakout Forex Trading Strategy
Now, let’s talk about how to actually trade it.
The first thing that you should know is that you should use the range definition that takes into account only the body of the candlesticks, not the wicks.
If you look at the GBP/USD chart below you’ll see that I’ve defined the trading range.
What makes this strategy efficient is that the Asia trading range usually involves buy and sell stops which are above and below the trading range. A massive amount of buy and sell stops is a sitting target for smart money.
The majority of the traded volume is present in the London session, therefore the Forex market typically advances in one or another direction.
As you can see below, the GBP/USD pair is making a one-sided move.
Right after the London market opens, you need to see the price fading the pre-open movement. If that happens, you’re certain that it was a false breakout.
What happens is that the smart money has used the pre-open move to set off the stops below the range. As a result, the stops reverse the tie and start buying. You should make your move 5 minutes after the confirmed price reversal.
In order to get our profit target, you can gauge the size of the Asia trading range and project it from the top or bottom of our range. However, know that such a setup can result in a trading day that can extend over the next several days.
Use a Time Stop Instead of a Price Stop
When trying to fade the London breakout, using a time stop over a price stop is more effective.
Employing the time stop to London breakout strategy is quite simple. If the first hour after the London market open didn’t entirely reverse the pre-opening breakout, you should exit the market.
In conclusion, the London breakout strategy, if used correctly, can significantly boost your success chances as a Forex trader.
To make sure you’re doing it right, the 3 main principles you should pay attention to when trading this strategy are market volatility, fading the pre-open breakout and using a time-stop.
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